Summary/TL;DR
Health Savings Accounts (HSAs) are investment accounts that offer substantial tax benefits to those eligible to participate in them – those enrolled in a High Deductible Health Plan (HDHP). Proposed changes to HSAs included in the “Big, Beautiful, Tax Bill” involve eligibility of retirees, potentially substantial increases to contribution limits, an expansion of the definition of Qualified Medical Expenses, and more.
Introduction
The tax and budget bill making its way through Congress currently has some provisions that will make some changes to Health Savings Accounts (HSAs). Today’s post discusses the biggest proposed changes and offers some commentary on how impactful they might be.
HSA Basics
Health Savings Accounts (HSAs) are investment accounts that offer considerable tax-efficiency for those who know how to use them. Contributions to an HSA are made on a pre-tax basis and investments grow and may be distributed tax-free as long as they are used for “qualified medical expenses”. Any funds used to pay for non-qualifying expenses will be subject to taxes and penalties. However, the penalty for non-qualifying distributions goes away once you turn 65, essentially turning your HSA into a Traditional IRA that is not subject to Required Minimum Distributions. The only requirement for being eligible to contribute to an HSA is to be covered by a qualifying High Deductible Health Plan (HDHP) and have no other disqualifying coverage (such as Medicare).
Furthermore, unlike the common Flexible Savings Account (FSA), unused funds in an HSA are yours to keep forever. The account follows you from job to job and all throughout retirement. The assets simply remain invested until you decide to distribute them at a later date. Finally, HSAs are passed tax-free to your surviving spouse who may continue to use the account as you did.
Now that we’ve discussed the basics for understanding HSAs, we can turn to the proposed changes in the new tax bill.
Contributions For Retirees
Current Law: HSA contributions are prohibited when you’re covered by a non-High Deductible Health Plan (HDHP), meaning that retirees become ineligible for making contributions as soon as they enroll in Medicare Part A at age 65.
Proposed Law: Enrollment in Medicare Part A would no longer disallow you from making HSA contributions
Commentary: This change really only impacts workers who want to work past age 65, which I’d imagine is a minority of those contributing to an HSA in the first place. Regardless, I believe that HSAs should be available to savers without restriction, so this at least a step in a positive direction.
Contributions Limits
Current Law: Annual contribution limits of $4,300 for single and $8,550 for family coverage are in place for 2025 and apply equally to all eligible taxpayers regardless of income.
Proposed Law: Individuals making less than $75,000 (or families making $150,000) may double their allowable annual contributions. These additional contributions would be phased out for individuals making $100,000 or families making $200,000.
Commentary: While this is a welcome change, I don’t see it being exceptionally impactful. Removing savings limits on those with smaller abilities to save in the first place seems contradictory.
Expansion of Qualified Medical Expenses
Current Law: Fitness and sports expenses are not considered Qualified Medical Expenses. Also, HSA funds may only be used to pay for QMEs incurred after the HSA is opened.
Proposed Law: Expands the definition of QMEs to include sports and fitness expenses, allowing HSA participants to use their funds to pay for things like gym memberships, fitness classes, or personal trainers. These would still be capped, however, at $500/yr for individuals and $1,000/yr for families.
Also, HSA funds may be used to pay for medical services incurred up to 60 days before the HSA was opened. These expenses still must have been incurred while under the coverage of an HDHP.
Commentary: The expansion of QMEs is certainly welcome, although the annual limits placed on such expenses is questionable. I’m not sure what the point of the retroactive expense rule is or who would ever be able to use it.
Other smaller tweaks to the rules could be coming as well, such as allowing spouses to make their catch-up contributions to the same HSA or allowing those with a spouse who has a Flexible Savings Account (FSA) to participate in their employer’s HSA. Overall, the spirit of the bill - at least as far as HSAs are concerned - is currently aimed in the right direction by making HSAs more accessible and increasing their overall utility. This is a trend that I hope continues in future legislation.
